UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
OR
 
☐ 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________ to _________
 
Commission File Number 001-33034
 
FREEDOM HOLDING CORP.
(Exact name of registrant as specified in its charter)
 
Nevada
 
30-0233726
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 “Esentai Tower” BC, Floor 7
77/7 Al Farabi Ave
 
 
Almaty, Kazakhstan
 
050040
(Address of principal executive offices)
 
(Zip Code)
 
+7 727 311 10 64
(Registrant's telephone number, including area code)
 
Securities registered under Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common
 
FRHC
 
The Nasdaq Capital Market
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
 
As of November 12, 2019, the registrant had 58,153,212 shares of common stock, par value $0.001, issued and outstanding.
 

 
 
 
FREEDOM HOLDING CORP.
FORM 10-Q
 
TABLE OF CONTENTS
 
PART I — FINANCIAL INFORMATION
Page
 
 
2
 
 
2
 
 
3
 
 
4
 
 
6
 
 
7
 
 
31
 
 
42
 
 
42
 
 
PART II — OTHER INFORMATION
 
 
 
43
 
 
43
 
 
43
 
 
44
 
 
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
ASSETS
 
 
 
 
 
 
Cash and cash equivalents
 $80,875 
 $49,960 
Restricted cash
  51,177 
  38,460 
Trading securities
  163,823 
  167,949 
Available-for-sale securities, at fair value
  8,588 
  2 
Brokerage and other receivables, net
  76,883 
  73,836 
Loans issued
  6,756 
  2,525 
Deferred tax assets
  599 
  1,265 
Fixed assets, net
  6,001 
  5,563 
Intangible assets, net
  3,821 
  4,226 
Goodwill
  2,914 
  2,936 
Operating lease right-of-use assets
  14,472 
  - 
Other assets, net
  9,732 
  4,189 
 
    
    
TOTAL ASSETS
 $425,641 
 $350,911 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
 
    
    
Securities sold, not yet purchased – at fair value
 $3,631 
 $- 
Derivative liability
  80 
  - 
Loans received
  89 
  4,008 
Debt securities issued
  26,776 
  28,538 
Customer liabilities
  150,615 
  82,032 
Trade payables
  9,000 
  32,695 
Deferred distribution payments
  8,534 
  8,534 
Securities repurchase agreement obligations
  70,717 
  73,621 
Current income tax liability
  2,609 
  754 
Operating lease obligations
  15,979 
  - 
Other liabilities
  3,492 
  3,132 
TOTAL LIABILITIES
  291,522 
  233,314 
 
    
    
Commitments and Contingent Liabilities
  - 
  - 
 
    
    
STOCKHOLDERS’ EQUITY
    
    
 
    
    
Preferred stock - $0.001 par value;20,000,000 shares authorized, no shares issued or outstanding
  - 
  - 
Common stock - $0.001 par value; 500,000,000 shares authorized; 58,093,212 and 58,043,212 shares issued and outstanding as of September 30, 2019 and March 31, 2019, respectively
  58 
  58 
Additional paid in capital
  101,247 
  99,093 
Retained earnings
  56,966 
  41,498 
Accumulated other comprehensive loss
  (24,458)
  (23,052)
TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY
  133,813 
  117,597 
 
    
    
Noncontrolling interest
  306 
  - 
TOTAL STOCKHOLDERS’ EQUITY
  134,119 
  117,597 
 
    
    
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 $425,641 
 $350,911 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
2
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE INCOME/(LOSS) (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
 
 
 
Three months ended
September 30,
 
 
Six months ended
September 30,
 
 
 
2019
 
 
2018
 
 
2019
 
 
2018
 
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fee and commission income
 $26,363 
 $12,786 
 $48,955 
 $18,759 
Net gain on trading securities
  3,947 
  4,317 
  6,509 
  1,028 
Interest income
  1,805 
  1,474 
  5,936 
  8,847 
Net gain/(loss) on foreign exchange operations
  875 
  (1,138)
  839 
  (3,248)
 
    
    
    
    
TOTAL REVENUE, NET
  32,990 
  17,439 
  62,239 
  25,386 
 
    
    
    
    
Expense:
    
    
    
    
Interest expense
  3,201 
  3,678 
  6,809 
  8,291 
Fee and commission expense
  4,512 
  968 
  8,543 
  1,733 
Operating expense
  13,921 
  10,044 
  26,606 
  19,155 
(Recovery)/ provision for impairment losses
  (395)
  109 
  (1,468)
  115 
Other expense, net
  249 
  296 
  557 
  236 
Loss from disposal of subsidiary
  - 
  15 
  - 
  15 
TOTAL EXPENSE
  21,488 
  15,110 
  41,047 
  29,545 
NET INCOME/(LOSS) BEFORE INCOME TAX
  11,502 
  2,329 
  21,192 
  (4,159)
 
    
    
    
    
Income tax expense
  (2,866)
  (614)
  (4,342)
  (464)
 
    
    
    
    
NET INCOME/(LOSS)
  8,636 
  1,715 
  16,850 
  (4,623)
 
    
    
    
    
Less: Net loss attributable to noncontrolling interest in subsidiary
  (129)
  - 
  (129)
  - 
NET INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
 $8,765 
 $1,715 
 $16,979 
 $(4,623)
 
    
    
    
    
OTHER COMPREHENSIVE INCOME/(LOSS)
    
    
    
    
Change in unrealized gain on available-for-sale securities, net of tax effect
 $27 
 $- 
 $27 
 $- 
Reclassification adjustment relating to available-for-sale securities disposed of in the period, net of tax effect
  - 
  - 
  - 
  22 
    Foreign currency translation adjustments, net of tax effect
  (2,076)
  (5,523)
  (1,433)
  (12,240)
 
    
    
    
    
COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING INTERESTS
 $6,587 
 $(3,808)
 $15,444 
 $(16,841)
 
    
    
    
    
Less: Comprehensive loss attributable to noncontrolling interest in subsidiary
  (129)
  - 
  (129)
  - 
 
    
    
    
    
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
 $6,716 
 $(3,808)
 $15,573 
 $(16,841)
BASIC NET INCOME/(LOSS) PER COMMON SHARE
(In US Dollars)
 $0.15 
 $0.03 
 $0.29 
 $(0.08)
DILUTED NET INCOME/(LOSS) PER COMMON SHARE (In US Dollars)
 $0.15 
 $0.03 
 $0.29 
 $(0.08)
Weighted average number of shares (basic)
  58,093,212 
  58,033,212 
  58,073,157 
  58,033,212 
Weighted average number of shares (diluted)
  58,309,147 
  58,213,477 
  58,280,178 
  58,213,728 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
3
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
For the six months ended
 
 
 
September 30,
2019
 
 
September 30,
2018
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities
 
 
 
 
 
 
Net income/(loss)
 $16,850 
 $(4,623)
Adjustments to reconcile net income/(loss) from operating activities:
    
    
       Depreciation and amortization
  1,382 
  819 
       Depreciation of lease assets
  2,164 
  - 
Loss on sale of fixed assets
  201 
  32 
Change in deferred taxes
  670 
  (173)
Stock compensation expense
  1,554 
  1,686 
Share based payment
  836 
  - 
Unrealized loss on trading securities
  247 
  16,017 
Net change in accrued interest
  994 
  134 
Allowance for receivables
  (1,468)
  - 
Changes in operating assets and liabilities:
    
    
Changes in lease liabilities
  (3,104)
  - 
Trading securities
  1,513 
  24,380 
Brokerage and other receivables
  150 
  (53,928)
Loans issued
  (4,215)
  5,382 
Other assets
  (5,469)
  (218)
Derivative liabilities
  80 
  - 
Customer liabilities
  69,954 
  41,284 
Current income tax liability
  1,852 
  607 
Trade payables
  (25,570)
  12,237 
Securities sold, not yet purchased
  3,631 
  (419)
Other liabilities
  254 
  667 
Net cash flows from operating activities
  62,506 
  43,884 
 
    
    
Cash Flows From Investing Activities
    
    
Purchase of fixed assets
  (1,903)
  (2,299)
Proceeds from sale of fixed assets
  245 
  283 
Proceeds from sale/(purchase) of available-for-sale securities, at
fair value
  (8,560)
  241 
Consideration paid for Asyl Invest
  - 
  (2,240)
Net cash flows used in investing activities
  (10,218)
  (4,015)
 
Cash Flows From Financing Activities
 
 
 
 
 
 
Repurchase of securities repurchase agreement obligations
  (1,404)
  (61,106)
Proceeds from issuance of debt securities
  2,909 
  17,077 
Repurchase of debt securities
  (4,441)
  (2,794)
Repayment of loans received
  (3,919)
  (3,055)
Exercise of options
  99 
  - 
Capital contributions
  - 
  225 
Net cash flows used in financing activities
  (6,756)
  (49,653)
 
Effect of changes in foreign exchange rates on cash and cash equivalents
  (1,900)
  (8,539)
 
    
    
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
  43,632 
  (18,323)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
  88,420 
  87,693 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
 $132,052 
 $69,370 
  
 
4
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
  For the six months ended
 
 
 
  September 30,
2019
 
 
  September 30,
2018
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid for interest
 $5,137 
 $7,736 
Income tax paid
 $1,825 
 $416 
 
    
    
Supplemental non-cash disclosures:
    
    
Operating lease right-of-use assets obtained in exchange for operating lease obligations
 $14,960 
 $- 
Lease obligations obtained on adoption of new lease standard
 $16,471 
 $- 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
5
 
FREEDOM HOLDING CORP.
 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(All amounts in thousands of United States dollars, except share data, unless otherwise stated)
 
 
 
Common Stock
 
 
Additional paid in
 
 
Retained
 
 
Accumulated other comprehensive
 
 
Non-Controlling
 
 
 
 
 
 
Shares
 
 
Amount
 
 
capital
 
 
earnings
 
 
loss
 
 
Interest
 
 
Total
 
At March 31, 2018
  58,033,212 
 $58 
 $100,180 
 $34,351 
 $(7,557)
 $- 
 $127,032 
 
    
    
    
    
    
    
    
Capital contributions
  - 
  - 
  225 
  - 
  - 
  - 
  225 
Acquisition of Asyl Invest
  - 
  - 
  (2,240)
  - 
  - 
  - 
  (2,240)
Stock based compensation
  - 
  - 
  1,685 
  - 
  - 
  - 
  1,685 
Reclassification adjustment relating to available-for-sale investments disposed of in the period, net of tax effect
  - 
  - 
  - 
  - 
  22 
  - 
  22 
Translation difference
  - 
  - 
  - 
  - 
  (12,240)
  - 
  (12,240)
Net loss
  - 
  - 
  - 
  (4,623)
  - 
  - 
  (4,623)
At September 30, 2018
  58,033,212 
 $58 
 $99,850 
 $29,728 
 $(19,775)
 $- 
 $109,861 
 
    
    
    
    
    
    
    
At March 31, 2019
  58,043,212 
 $58 
 $99,093 
 $41,498 
 $(23,052)
 $- 
 $117,597 
 
    
    
    
    
    
    
    
Cumulative-effect adjustment due to adoption of ASU 2016-02(1)
  - 
  - 
  - 
  (1,511)
  - 
    
  (1,511)
Exercise of options
  50,000 
  - 
  99 
  - 
  - 
  - 
  99 
Stock based compensation
  - 
  - 
  1,554 
  - 
  - 
  - 
  1,554 
Share based payment
  - 
  - 
  836 
  - 
  - 
  - 
  836 
Sale of Freedom UA shares
  - 
  - 
  (335)
  - 
  - 
  435 
  100 
Change in unrealized gain on available-for-sale securities, net of tax effect
  - 
  - 
  - 
  - 
  27 
  - 
  27 
Translation difference
  - 
  - 
  - 
  - 
  (1,433)
  - 
  (1,433)
Net income
  - 
  - 
  - 
  16,979
  - 
  (129)
 16,850
At September 30, 2019
  58,093,212 
 $58 
 $101,247 
 $56,966
 $(24,458)
 $306 
 $134,119
 
(1) Cumulative-effect adjustment to beginning retained earnings related to the recognition of pre-existing lease liabilities and operating lease right-of-use assets in accordance with ASU 2016-02, adopted as of April 1, 2019.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
6
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
NOTE 1 – DESCRIPTION OF BUSINESS
 
Overview
 
Freedom Holding Corp. (the “Company” or “FRHC”) is a corporation organized in the United States under the laws of the State of Nevada that through its operating subsidiaries provides financial services including retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services in Eastern Europe and Central Asia. The Company is headquartered in Almaty, Kazakhstan, with supporting administrative office locations in Russia, Cyprus and the United States. The Company has retail locations in Russia, Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan and Germany. The Company’s common stock was uplisted from the OTCQX Best Market and began trading on the Nasdaq Capital Market on October 15, 2019.
 
The Company owns directly, or through subsidiaries, the following companies: LLC Investment Company Freedom Finance, a Moscow, Russia-based securities broker-dealer (“Freedom RU”); LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based securities broker-dealer (“Freedom KZ”); Freedom Finance Cyprus Limited, a Limassol, Cyprus-based broker-dealer (“Freedom CY”); Freedom Finance Germany TT GmbH (“Freedom GE”), a Munich, Germany-based tied agent of Freedom CY; LLC Freedom Finance Uzbekistan, a Tashkent, Uzbekistan-based broker-dealer (“Freedom UZ”); and FFIN Securities, Inc., a Nevada corporation (“FFIN”).
 
To comply with certain foreign ownership restrictions relating to registered Ukrainian broker-dealers, on August 24, 2019, the Company sold 67.12% of the outstanding equity interest of LLC Freedom Finance Ukraine, a Kiev, Ukraine-based broker-dealer (“Freedom UA”) to Askar Tashtitov, the Company’s president. The Company retained the remaining 32.88% of the outstanding equity interests in Freedom UA. On August 24, 2019, the Company also entered into a series of contractual arrangements with Freedom UA and Mr. Tashtitov, including a consulting services agreement, an operating agreement and an option agreement. Because such agreements obligate the Company to guarantee the performance of all Freedom UA obligations and provide Freedom UA sufficient funding to cover all Freedom UA operating losses and net capital requirements, enable the Company to receive 90% of the net profits of Freedom UA after tax, and require the Company to provide Freedom UA the management competence, operational support, and ongoing access to the Company’s significant assets, technology resources and expertise to necessary to conduct the business of Freedom UA, the Company accounts for Freedom UA as a variable interest entity (“VIE”) under the accounting standards of the Financial Accounting Standards Board (“FASB”). Accordingly, the financial statements of Freedom UA are consolidated into the financial statements of the Company.
 
The Company’s subsidiaries are participants on the Kazakhstan Stock Exchange (KASE), Astana International Exchange (AIX), Moscow Exchange (MOEX), Saint-Petersburg Exchange (SPB), Ukrainian Exchange (UX), and Republican Stock Exchange of Tashkent (UZSE). Freedom CY serves to provide the Company’s clients with operations support and access to the investment opportunities, relative stability, and integrity of the U.S. and European securities markets, which under the regulatory regimes of many jurisdictions where the Company operates do not currently allow investors direct access to international securities markets.
 
 
7
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Unless otherwise specifically indicated or as is otherwise contextually required, FRHC, Freedom RU, FFIN Bank, Freedom KZ, Freedom CY, Freedom GE, Freedom UA, Freedom UZ and FFIN are collectively referred to herein as the “Company”.
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of presentation and principles of consolidation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended September 30, 2019, are not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2020.
 
The Condensed Consolidated Balance Sheet at March 31, 2019, has been derived from the audited consolidated financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.
 
The Company’s unaudited condensed consolidated financial statements present the consolidated accounts of FRHC, Freedom RU, Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, Freedom GE and FFIN. All significant inter-company balances and transactions have been eliminated from the unaudited condensed consolidated financial statements.
 
For further information, refer to the consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2019.
 
Consolidation of variable interest entities
 
In accordance with accounting standards regarding consolidation of variable interest entities, VIEs are generally entities that lack sufficient equity to finance their activities without additional financial support from other parties or whose equity holders lack adequate decision making ability. VIEs must be evaluated to determine the primary beneficiary of the risks and rewards of the VIE. The primary beneficiary is required to consolidate the VIE for financial reporting purposes.
 
 
8
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Use of estimates
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that the estimates used in preparing its financial statements are reasonable and prudent. Actual results could differ from those estimates.
 
Revenue recognition
 
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services promised to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. A significant portion of the Company’s revenue-generating transactions are not subject to ASC Topic 606, including revenue generated from financial instruments, such as loans and investment securities, as these activities are subject to other U.S. GAAP guidance discussed elsewhere within these disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC Topic 606, which are presented in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) as components of non-interest income are as follows:
 
Commissions on brokerage services;
Commissions on banking services (money transfers, foreign exchange operations and other); and
Commissions on investment banking services (underwriting, market making, and bondholders’ representation services).
 
The Company adopted the guidance on April 1, 2018. Under Topic 606, the Company is required to recognize incentive fees when they are probable and there is not a significant chance of reversal in the future. For the brokerage commission, banking service commission and investment banking services commission contracts in place at the time of adoption, this change in policy did not result in any actual change in revenue that had already been recognized and therefore there was no transition adjustment necessary. 
 
 
9
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The Company recognizes revenue when five basic criteria have been met:
 
The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.
The entity can identify each party’s rights regarding the goods or services to be transferred.
The entity can identify the payment terms for the goods or services to be transferred.
The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).
It is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
 
Derivative financial instruments
 
In the normal course of business, the Company invests in various derivative financial contracts including futures. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured to their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative.
 
Functional currency
 
Management has adopted ASC 830, Foreign Currency Translation Matters as it pertains to its foreign currency translation. The Company’s functional currencies are the Russian ruble, European euro, Ukrainian hryvnia, Uzbekistani som and Kazakhstani tenge, and its reporting currency is the United States dollar. Monetary assets and liabilities denominated in foreign currencies are translated into United States dollars using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in “Other Comprehensive Income/(Loss)”.
 
For financial reporting purposes, foreign currencies are translated into U.S. dollars as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet dates. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated other comprehensive loss”.
 
 
10
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Cash and cash equivalents
 
Cash and cash equivalents are generally comprised of certain highly liquid investments with maturities of three months or less at the date of purchase. Cash and cash equivalents include reverse repurchase agreements which are recorded at the amounts at which the securities were acquired or sold plus accrued interest.
 
Securities reverse repurchase and repurchase agreements
 
A reverse repurchase agreement is a transaction in which the Company purchases financial instruments from a seller, typically in exchange for cash, and simultaneously enters into an agreement to resell the same or substantially the same financial instruments to the seller for an amount equal to the cash or other consideration exchanged plus interest at a future date. Securities purchased under reverse repurchase agreements are accounted for as collateralized financing transactions and are recorded at the contractual amount for which the securities will be resold, including accrued interest. Financial instruments purchased under reverse repurchase agreements are recorded in the financial statements as cash placed on deposit collateralized by securities and classified as cash and cash equivalents in the Condensed Consolidated Balance Sheets.
 
A repurchase agreement is a transaction in which the Company sells financial instruments to another party, typically in exchange for cash, and simultaneously enters into an agreement to reacquire the same or substantially the same financial instruments from the buyer for an amount equal to the cash or other consideration exchanged plus interest at a future date. These agreements are accounted for as collateralized financing transactions. The Company retains the financial instruments sold under repurchase agreements and classifies them as trading securities in the Condensed Consolidated Balance Sheets. The consideration received under repurchase agreements is classified as securities repurchase agreement obligations in the Condensed Consolidated Balance Sheets.
 
The Company enters into reverse repurchase, repurchase, securities borrowed and securities loaned transactions to, among other things, acquire securities to leverage and grow its proprietary trading portfolio, cover short positions and settle other securities obligations, to accommodate customers’ needs and to finance its inventory positions. The Company enters into these transactions in accordance with normal market practice. Under standard terms for repurchase transactions, the recipient of collateral has the right to sell or repledge the collateral, subject to returning equivalent securities on settlement of the transaction.
 
Available-for-sale securities
 
Financial assets categorized as available-for-sale (“AFS”) are non-derivatives that are either designated as available-for-sale or not classified as (a) loans and receivables, (b) held to maturity investments or (c) trading securities.
 
 
11
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Listed shares and listed redeemable notes held by the Company that are traded in an active market are classified as AFS and are stated at fair value. The Company has investments in unlisted shares that are not traded in an active market but that are also classified as investments AFS and stated at fair value (because Company management considers that fair value can be reliably measured). Gains and losses arising from changes in fair value are recognized in other comprehensive income/(loss) and are accumulated in accumulated other comprehensive loss, with the exception of other-than-temporary impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses, which are recognized in the Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss). Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments’ revaluation reserve is then reclassified to Condensed Consolidated Statements of Operations and Statements of other Comprehensive Income/(Loss).
 
Trading securities
 
Financial assets are classified as trading securities if the financial asset has been acquired principally for the purpose of selling it in the near term.
 
Trading securities are stated at fair value, with any gains or losses arising on remeasurement recognized in revenue. Changes in fair value are recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) and included in net gain/(loss) on trading securities. Interest earned and dividend income are recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) and are included in interest income, according to the terms of the contract and when the right to receive the payment has been established.
 
Investments in nonconsolidated managed funds are accounted for at fair value based on the net asset value (“NAV”) of the funds provided by the fund managers with gains or losses included in net gain on trading securities in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).
 
Debt securities issued
 
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized over the period of the borrowings using the effective interest method. If the Company purchases its own debt, it is removed from the Condensed Consolidated Balance Sheets and the difference between the carrying amount of the liability and the consideration paid is recognized in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss).
 
 
12
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Brokerage and other receivables
 
Brokerage and other receivables are comprised of commissions and receivables related to the securities brokerage and banking activity of the Company. At initial recognition, brokerage and other receivables are recognized at fair value. Subsequently, brokerage and other receivables are carried at cost net of any allowance for impairment losses.
 
Derecognition of financial assets
 
A financial asset (or, where applicable, a part of a financial asset or a part of a group of similar financial assets) is derecognized where all of the following conditions are met:
 
The transferred financial asset has been isolated from the Company - put presumptively beyond the reach of the Company and its creditors, even in bankruptcy or other receivership.
The transferee has rights to pledge or exchange the financial asset.
The Company or its agents do not maintain effective control over the transferred financial asset or third-party beneficial interests related to the transferred asset.
 
Where the Company has not met the asset derecognition conditions above, it continues to recognize the asset to the extent of its continuing involvement.
 
Impairment of long-lived assets
 
In accordance with the accounting guidance for the impairment or disposal of long-lived assets, the Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the fair value from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows, discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. As of September 30, 2019 and March 31, 2019, the Company had not recorded any charges for impairment of long-lived assets.
 
Impairment of goodwill
 
As of September 30, 2019 and March 31, 2019, goodwill recorded in the Company’s Condensed Consolidated Balance Sheets totaled $2,914 and $2,936, respectively. The Company performs an impairment review at least annually unless indicators of impairment exist in interim periods. The impairment test for goodwill uses a two-step approach. Step one compares the estimated fair value of a reporting unit with goodwill to its carrying value. If the carrying value exceeds the estimated fair value, step two must be performed. Step two compares the carrying value of the reporting unit to the fair value of all of the assets and liabilities of the reporting unit as if the reporting unit was acquired in a business combination. If the carrying amount of a reporting unit's goodwill exceeds the implied fair value of its goodwill, an impairment loss is recognized in an amount equal to the excess. In its annual goodwill impairment test, the Company estimated the fair value of the reporting unit based on the income approach (also known as the discounted cash flow method) and determined the fair value of the Company’s goodwill exceeded the carrying amount of the Company’s goodwill.
 
 
13
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The changes in the carrying amount of goodwill as of March 31, 2019 and for the six months ended September 30, 2019 were as follows:
 
Balance as of March 31, 2019
 $2,936 
 
    
Foreign currency translation
  (22)
 
    
Balance as of September 30, 2019
 $2,914 
 
Income taxes
 
The Company recognizes deferred tax liabilities and assets based on the difference between the financial statements and tax basis of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.
 
Current income tax expenses are provided for in accordance with the laws of the relevant taxing authorities. As part of the process of preparing financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. The Company accounts for income taxes using the asset and liability approach. Under this method, deferred income taxes are recognized for tax consequences in future years based on differences between the tax bases of assets and liabilities and their reported amounts in the financial statements at each year-end and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates applicable for the differences that are expected to affect taxable income.
 
The Company will include interest and penalties arising from the underpayment of income taxes in the provision for income taxes. As of September 30, 2019 and March 31, 2019, the Company had no accrued interest or penalties related to uncertain tax positions.
 
The Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has presented the deferred tax impacts of GILTI tax in its condensed consolidated financial statements as of September 30, 2019 and March 31, 2019.
 
Financial instruments  
 
Financial instruments are carried at fair value as described below.
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. Fair value is the current bid price for financial assets, current ask price for financial liabilities and the average of current bid and ask prices when the Company is both in short and long positions for the financial instrument. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
 
 
14
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Leases
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases have been classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss). The new standard also requires disclosures that provide additional information on recorded lease arrangements. In July 2018, the FASB issued ASU 2018-11, Leases –Targeted Improvements, which provides an optional transition method that allows entities to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
 
The Company adopted the provisions of ASU 2018-11, including the optional transition method, on April 1, 2019. Operating lease assets and corresponding lease liabilities were recognized on the Company’s unaudited condensed consolidated statements of balance sheets. Refer to Note 18 - Leases, within the notes to the unaudited condensed consolidated financial statements for additional disclosure and significant accounting policies affecting leases.
 
Fixed assets
 
Fixed assets are carried at cost, net of accumulated depreciation. Maintenance, repairs, and minor renewals are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range between three and seven years.
 
Segment information
 
The Company operates in a single operating segment offering financial services to its customers in a single geographic region covering Central Asia and Eastern Europe. The Company’s financial services business provides retail securities brokerage, research, investment counseling, securities trading, market making, corporate investment banking and underwriting services to its customers. The Company generates revenue from customers primarily from fee and commission income and interest income. The Company does not use profitability reports or other information disaggregated on a regional, country or divisional basis for making business decisions.
 
Recent accounting pronouncements
 
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. In March 2014, the Board issued a proposed FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The disclosure framework project’s objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements by facilitating clear communication of the information required by GAAP. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments in this Update apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
 
 
15
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. On June 16, 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which introduced an expected credit loss methodology for the impairment of financial assets measured at amortized cost basis. That methodology replaces the probable, incurred loss model for those assets. Through that Update, the Board added Topic 326 and made several consequential amendments to the FASB Accounting Standards Codification. The amendment clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The effective date and transition requirements for the amendments in this Update are the same as the effective dates and transition requirements in Update 2016-13, as amended by this Update. The Company does not expect a material impact from the new guidance on its condensed consolidated financial statements.
 
In April 2019, FASB also issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and in May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326). The ASU 2019-04 amendments affect a variety of Topics in the Codification and is part of the Board’s ongoing project on Codification improvement. The FASB received several agenda request letters asking that the Board consider amending the transition guidance for Update 2016-13. ASU 2019-05 addresses stakeholders’ concerns by providing an option to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost basis. For those entities, the targeted transition relief will increase comparability of financial statement information by providing an option to align measurement methodologies for similar financial assets. Furthermore, the targeted transition relief also may reduce the costs for some entities to comply with the amendments in Update 2016-13 while still providing financial statement users with decision-useful information. For entities that have not yet adopted the amendments in Update 2016-13, the effective dates and transition requirements for the amendments related to ASU 2019-04 are the same as the effective dates and transition requirements in Update 2016-13. ASU 2019-05 is effective for entities that have adopted the amendments in Update 2016-13 for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted in any interim period after the issuance of this Update as long as an entity has adopted the amendments in Update 2016-13. The Company is currently evaluating the impact from new guidance on its condensed consolidated financial statements.
 
In July 2019, the FASB issued ASU 2019-07, Codification Updates to SEC Sections. This ASU amends various SEC paragraphs pursuant to the issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization. One of the changes in the ASU requires a presentation of changes in stockholders’ equity in the form of a reconciliation, either as a separate financial statement or in the notes to the financial statements, for the current and comparative year-to-date interim periods. The Company presented changes in stockholders' equity as separate financial statements for the current and comparative year-to-date interim periods beginning on April 1, 2019. The additional elements of the ASU did not have a material impact on the Company's condensed consolidated financial statements. This guidance was effective immediately upon issuance.
 
 
16
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
NOTE 3 – CASH AND CASH EQUIVALENTS
 
Cash and cash equivalents consist of the following:
 
 
 
September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Accounts with stock exchanges
 $24,333 
 $10,507 
Current accounts with commercial banks
  21,517 
  6,656 
Securities purchased under reverse repurchase agreements
  11,363 
  7,887 
Petty cash in bank vault and on hand
  4,938 
  2,674 
Current accounts in clearing organizations
  4,510 
  5,887 
Current account with Central Depository (Kazakhstan)
  4,202 
  2,693 
Current accounts with brokers
  4,165 
  10,220 
Current account with National Settlement Depository (Russia)
  3,502 
  1,275 
Current account with Central Bank (Russia)
  2,345 
  2,161 
Total cash and cash equivalents
 $80,875 
 $49,960 
 
As of September 30, 2019 and March 31, 2019, cash and cash equivalents were not insured.
 
As of September 30, 2019 and March 31, 2019, the cash and cash equivalents balance included collateralized securities received under reverse repurchase agreements on the terms presented below:
 
 
 
September 30, 2019
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average Interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
Total
 
Securities purchased under reverse repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  10.98%
 $9,894
 
 $- 
 $9,894
 
Corporate debt 
  12.75%
  1,469
 
  -
 
  1,469
 
Total
    
 $11,363 
 $- 
 $11,363 
 
 
 
March 31, 2019
 
 
 
Interest rates and remaining contractual maturity of the agreements
 
 
 
Average Interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
  Total
 
Securities purchased under reverse repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  11.90%
 $4,328 
 $804 
 $5,132 
Corporate debt
  14.00%
  120 
  - 
  120 
Non-U.S. sovereign debt
  8.25%
  2,635 
  - 
  2,635 
Total
    
 $7,083 
 $804 
 $7,887 
 
 
17
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The securities received by the Company as collateral under reverse repurchase agreements are liquid trading securities with market quotes and significant trading volume. The fair value of collateral received by the Company under reverse repurchase agreements as of September 30, 2019 and March 31, 2019, was $11,557 and $8,472, respectively.
 
NOTE 4 – RESTRICTED CASH
 
As of September 30, 2019 and March 31, 2019, the Company’s restricted cash consisted of deferred distribution payments, cash segregated in a special custody account for the exclusive benefit of our brokerage customers and required reserves with the Central Bank of the Russian Federation which represents cash on hand balance requirements. In June 2019 the Company invested the $8,534 held for deferred distribution payments into certain financial instruments. For additional information regarding funds held for deferred distribution payments, see Note 5 - Trading and Available-For-Sale Securities at Fair Value.
 
Restricted cash consisted of:
 
 
 
  September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Brokerage customers’ cash
 $47,083 
 $28,931 
Guaranty deposits
  3,601 
  732 
Reserve with Central Bank of Russia
  493 
  263 
Deferred distribution payments
  - 
  8,534 
Total restricted cash
 $51,177 
 $38,460 
 
NOTE 5 – TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR VALUE
 
As of September 30, 2019 and March 31, 2019, trading and available-for-sale securities consisted of:
 
 
 
  September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Equity securities
 $101,058 
 $105,017 
Debt securities
  62,765
  62,691 
Mutual investment funds
  - 
  241 
Total trading securities
 $163,823
 $167,949 
 
    
    
Certificates of deposit
 $7,012 
 $- 
Mutual investment funds
  690 
  - 
Debt securities
  567 
  - 
Preferred shares
  317 
  - 
Equity securities
  2 
  2 
Total available-for-sale securities, at fair value
 $8,588 
 $2 
 
The Company recognized no other than temporary impairment in accumulated other comprehensive income.
 
 
18
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The fair value of assets and liabilities is determined using observable market data based on recent trading activity. Where observable market data is unavailable due to a lack of trading activity, the Company utilizes internally developed models to estimate fair value and independent third parties to validate assumptions, when appropriate. Estimating fair value requires significant management judgment, including benchmarking to similar instruments with observable market data and applying appropriate discounts that reflect differences between the securities that the Company is valuing and the selected benchmark. Depending on the type of securities owned by the Company, other valuation methodologies may be required.
 
Measurement of fair value is classified within a hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
The valuation hierarchy contains three levels:
 
Level 1 - Valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets.
Level 2 - Valuation inputs are quoted market prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured.
Level 3 - Valuation inputs are unobservable and significant to the fair value measurement.
 
The following tables present trading and available-for-sale securities assets in the condensed consolidated financial statements at fair value on a recurring basis as of September 30, 2019 and March 31, 2019:
 
 
 
 
 
 
Fair Value Measurements at
 
 
 
 
 
 
September 30, 2019 using
 
 
 
 
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant Unobservable Inputs
 
 
 
September 30, 2019
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $101,058 
 $101,058 
 $- 
 $- 
Debt securities
  62,765 
  62,765 
  - 
  - 
Total trading securities
 $163,823 
 $163,823 
 $- 
 $- 
 
    
    
    
    
Certificates of deposit
 $7,012 
 $- 
 $7,012 
 $- 
Mutual investment funds
  690 
  690 
  - 
  - 
Debt securities
  567 
  - 
  567 
  - 
Preferred shares
  317 
  - 
  317 
  - 
Equity securities
  2 
  - 
  - 
  2 
Total available-for-sale securities, at fair value
 $8,588 
 $690 
 $7,896 
 $2 
 
 
19
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
   
 
 
Fair Value Measurements at March 31, 2019 using
 
 
 
 
  March 31,
 
 
Quoted Prices in Active Markets for Identical Assets 
 
 
Significant Other Observable Inputs 
 
 
Significant Unobservable Inputs 
 
 
 
 2019
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 $105,017 
 $105,017 
 $- 
 $- 
Debt securities
  62,691 
  62,187 
  - 
  504 
Mutual investment funds
  241 
  241 
  - 
  - 
Total trading securities
 $167,949 
 $167,445 
 $- 
 $504 
 
    
    
    
    
Equity securities
 $2 
 $- 
 $- 
 $2 
Total available-for-sale securities, at fair value
 $2 
 $- 
 $- 
 $2 
 
The table below presents the Valuation Techniques and Significant Level 3 Inputs used in the valuation as of March 31, 2019. The table is not intended to be all inclusive, but instead captures the significant unobservable inputs relevant to determination of fair value.
 
Type
 
Valuation Technique
 
 
FV as of March
31, 2019
 
 
Significant Unobservable Inputs
 
 
%
 
 
 
 
 
 
 
 
 
 
Corporate bonds
DCF
 $504 
Discount rate
  11.3%
 
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the six months ended September 30, 2019:
 
 
 
Trading
securities
 
 
Available for
sale securities
 
Balance as of March 31, 2019
 $504 
 $2 
 
    
    
Sale of investments that use Level 3 inputs
  (497)
  - 
Foreign currency translation
  (7)
  - 
Balance as of September 30, 2019
 $- 
 $2 
 
 
 
September 30, 2019
 
 
 
 Assets measured at amortized cost
 
 
 Unrealized gain/(loss) accumulated in other comprehensive income/(loss)
 
 
 Assets measured at fair value
 
 
    
    
    
Certificates of deposit
 $7,002 
 $10 
 $7,012 
Mutual investment funds
  685 
  5 
  690 
Debt securities
  569 
  (2)
  567 
Preferred shares
  304 
  13 
  317 
Equity securities
  1 
  1 
  2 
 
    
    
    
Available-for-sale securities, at fair value
 $8,561 
 $27 
 $8,588 
 
 
20
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
 
 
March 31, 2019
 
 
 
Assets measured at amortized cost
 
 
 Unrealized gain accumulated in other comprehensive income/(loss)
 
 
 Assets measured at fair value
 
Equity securities
 $1 
 $1 
 $2 
 
    
    
    
Available-for-sale securities, at fair value
 $1 
 $1 
 $2 
 
Of the available-for-sale securities, $8,534 is held as a reserve for distribution to shareholders who have not yet claimed their distributions from the 2011 sale of the Company’s oil and gas exploration and production operations. These funds are currently payable, subject to the entitled shareholders completing and submitting to the Company the necessary documentation to claim his, her or its distribution payments. The Company has no control over when, or if, any entitled shareholder will submit the necessary documentation to claim his, her, or its distribution payment.
 
NOTE 6 – BROKERAGE AND OTHER RECEIVABLES, NET
 
 
 
September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Margin lending receivables
 $74,440 
 $46,716 
Receivables from purchase or sale of securities
  1,768 
  27,684 
Receivables from brokerage clients
  331 
  824 
Dividends accrued
  16 
  108 
Other receivables
  464 
  130 
 
    
    
Allowance for receivables
  (136)
  (1,626)
 
    
    
Total brokerage and other receivables, net
 $76,883 
 $73,836 
 
On September 30, 2019 and March 31, 2019, amounts due from a single related party customer were $55,489 and $31,792, respectively or 72% and 43%, respectively of total brokerage and other receivables, net. Based on experience, the Company considers receivables due from related parties fully collectible. As of September 30, 2019 and March 31, 2019, using historical and statistical data, the Company recorded an allowance for brokerage receivables in the amount of $136 and $1,626, respectively.
 
 
21
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
NOTE 7 – LOANS ISSUED
 
Loans issued as of September 30, 2019, consisted of the following:
 
 
 
Amount Outstanding
 
 
  Due Dates
 
 
Average Interest Rate
 
 
Fair Value of Collateral
 
 
Loan Currency
 
 
 
 
 
 
 
 
 
 
 
 
 
Uncollateralized non-bank loan
 $2,651 
Sep. 2020
  2.00%
 $- 
USD
Subordinated loan
  2,007 
Apr. 2024
 6.00%
  - 
USD
Subordinated loan
  1,536 
Sep. 2029
 12.00%
  - 
UAH
Bank customer loans
  562 
Dec. 2019 – May 2044
  12.87%
  311 
RUB
 
 $6,756 
 
    
 $311 
 
 
Loans issued as of March 31, 2019, consisted of the following:
 
 
 
Amount Outstanding
 
 
  Due Dates
 
 
Average Interest Rate
 
 
Fair Value of Collateral
 
 
Loan Currency
 
 
 
 
 
 
 
 
 
 
 
 
 
Collateralized brokerage loans
 $1,888 
Dec. 2019
  4.75%
 $4,718 
USD
Bank customer loans
  637 
May 2019 – Jan. 2039
  13.34%
  - 
RUB
 
 $2,525 
 
    
 $4,718 
 
 
NOTE 8 – DEFERRED TAX ASSETS
 
The Company is subject to taxation in the Russian Federation, Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany and the United States of America.
 
The tax rates used for deferred tax assets and liabilities as of September 30, 2019 and March 31, 2019 is 21% for the U.S., 20% for the Russian Federation and Kazakhstan, 31% for Germany, 12.5% for Cyprus, 18% for Ukraine, 12% for Uzbekistan and 10% for Kyrgyzstan.
 
Deferred tax assets and liabilities of the Company are comprised of the following:
 
 
 
September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Deferred tax assets:
 
 
 
 
 
 
Tax losses carryforward
 $3,027 
 $2,376 
Revaluation on trading securities
  53 
  2,095 
Accrued liabilities
  60 
  35 
Valuation allowance
  (2,401)
  (3,241)
Deferred tax assets
 $739 
 $1,265 
 
    
    
Deferred tax liabilities:
    
    
Revaluation on trading securities
 $140 
 $- 
 
    
    
Deferred tax liabilities
 $140 
 $- 
 
    
    
Net deferred tax assets
 $599 
 $1,265 
 
 
22
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
During the six months ended September 30, 2019 and 2018, the Company’s effective tax rate was equal to 20.5% and 11.2%, respectively. The increase in effective tax rate was primarily attributable to U.S. state taxes on non-U.S. earnings which are not offset by tax credits.
 
NOTE 9 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR VALUE
 
As of September 30, 2019, and March 31, 2019 the Company’s securities sold, not yet purchased – at fair value was $3,631 and $0, respectively.
 
During the six months ended September 30, 2019, the Company sold shares received as a pledge under reverse repurchase agreements and recognized financial liabilities at fair value in the amount of $3,083 and partially closed short positions in the amount of $3,047 by purchasing securities from third parties, reducing its financial liability. During the six months ended September 30, 2019, the Company recognized a loss on the change in fair value of financial liabilities at fair value in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) in the amount of $20 with no foreign exchange translation gain/(loss).
 
During the six months ended September 30, 2019, the Company opened a short position and recognized financial liabilities at fair value in the amount of $3,200. During the six months ended September 30, 2019, the Company recognized a loss on the change in fair value of financial liabilities at fair value in the Condensed Consolidated Statements of Operations and Statements of Other Comprehensive Income/(Loss) in the amount of $415 with no foreign exchange translation gain/(loss).
 
A short sale involves the sale of a security that is not owned by the seller in the expectation of the seller purchasing the same security (or a security exchangeable) at a later date at a lower price. A short sale involves the risk of a theoretically unlimited increase in the market price of the security that would result in a theoretically unlimited loss.
 
NOTE 10 – LOANS RECEIVED
 
Loans received as of September 30, 2019, consisted of the following:
 
Borrower
 
Lender
 
 
September 30,
2019
 
 
Interest rate
 
 
Term
 
 
Maturity date
 
Freedom Finance Cyprus Limited
Non-Bank
 $89 
  1%
2 years
12/11/2019
Total
 
 $89 
    
 
 
 
 
23
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
Loans received as of March 31, 2019, consisted of the following:
 
Borrower
 
Lender
 
 
March 31,
2019
 
 
Interest rate
 
 
Term
 
 
Maturity date
 
Freedom Holding Corp.
Non-Bank
 $3,917 
  3%
1-2 years
04/30/2019-12/31/2019
Freedom Finance Cyprus Limited
Non-Bank
  91 
  1%
2 years
12/11/2019
Total
 
 $4,008 
    
 
 
 
Non-bank loans received are unsecured. As of September 30, 2019 and March 31, 2019, accrued interest on the loans totaled $2 and $52, respectively.
 
NOTE 11 – DEBT SECURITIES ISSUED
 
 
 
September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Debt securities issued denominated in USD
 $18,479 
 $20,265 
Debt securities issued denominated in RUB
  7,762 
  7,724 
Accrued interest
  535 
  549 
Total
 $26,776 
 $28,538 
 
As of September 30, 2019 and March 31, 2019, Freedom KZ and Freedom RU had bonds issued under Kazakhstan and Russian Federation law, respectively, in the amounts of $26,776 and $28,538 respectively, which have fixed annual coupon rates ranging from 8% to 12% and maturity dates ranging from June 2020 to February 2022.
 
Debt securities issued are initially recognized at the fair value of the consideration received, less directly attributable transaction costs. Debt securities issued as of September 30, 2019 and March 31, 2019, included $535 and $549 accrued interest, respectively. The Freedom KZ and Freedom RU bonds are actively traded on the Kazakhstan Stock Exchange and on the Moscow Exchange, respectively.
 
NOTE 12 – CUSTOMER LIABILITIES
 
The Company recognizes customer liabilities associated with funds held by our brokerage and bank customers. Customer liabilities consist of:
 
 
 
September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Brokerage customers
 $101,229 
 $47,686 
Banking customers
  49,386 
  34,346 
Total
 $150,615 
 $82,032 
 
As of September 30, 2019, banking customer liabilities consisted of current accounts and deposits of $36,028 and $13,358, respectively. As of March 31, 2019, banking customer liabilities consisted of current accounts and deposits of $12,383 and $21,963, respectively.
 
 
 
24
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
  
NOTE 13 – TRADE PAYABLES
 
 
 
September 30,
2019
 
 
March 31,
2019
 
 
 
 
 
 
 
 
Trade payable for securities purchased
 $4,879 
 $2,939 
Margin lending payable
  3,590 
  29,081 
Payables to suppliers of goods and services
  185 
  555 
Other payables
  346 
  120 
Total
 $9,000 
 $32,695 
 
On September 30, 2019 and March 31, 2019, trade payables due to a single related party were $2,928 or 33% and $938 or 3%, respectively.
 
NOTE 14 – SECURITIES REPURCHASE AGREEMENT OBLIGATIONS
 
As of September 30, 2019 and March 31, 2019, trading securities included collateralized securities subject to repurchase agreements as described in the following table:
 
 
 
September 30, 2019
 
 
 
  Interest rates and remaining contractual maturity of the agreements
 
 
 
 Average interest rate
 
 
 Up to 30 days
 
 
 30-90 days
 
 
 Over 90 days
 
 
 Total
 
Securities sold under repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  12.32%
 $46,817 
 $- 
 $- 
 $46,817 
Corporate debt
  10.40%
  9,152 
  - 
  - 
  9,152 
Non-U.S. sovereign debt
  9.45%
  14,748 
  - 
  - 
  14,748 
Total securities sold under repurchase agreements
    
 $70,717 
 $- 
 $- 
 $70,717 
 
 
 
March 31, 2019
 
 
 
Interest rate and remaining contractual maturity of the agreements
 
 
 
Average interest rate
 
 
Up to 30 days
 
 
30-90 days
 
 
Over 90 days
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities sold under repurchase agreements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate equity
  12.06%
 $49,048 
 $- 
 $2,146 
 $51,194 
Corporate debt
  10.38%
  13,548 
  - 
  - 
  13,548 
Non-U.S. sovereign debt
  8.62%
  8,879 
  - 
  - 
  8,879 
Total securities sold under repurchase agreements
    
 $71,475 
 $- 
 $2,146 
 $73,621 
 
 
25
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The fair value of collateral pledged under repurchase agreements as of September 30, 2019 and March 31, 2019, was $96,294 and $105,842, respectively.
 
Securities pledged as collateral by the Company under repurchase agreements are liquid trading securities with market quotes and significant trading volume.
 
NOTE 15 – RELATED PARTY TRANSACTIONS
 
During the three months ended September 30, 2019 and 2018, the Company earned commission income from related parties in the amount of $23,348 and $11,183 respectively. During the six months ended September 30, 2019 and 2018, the Company earned commission income from related parties in the amount of $43,174 and $15,622, respectively. Commission income earned from related parties is comprised primarily of brokerage commissions, margin fees and commissions for money transfers by brokerage clients.
 
During the three months ended September 30, 2019 and 2018, the Company paid commission expense to related parties in the amount of $1,471 and $0, respectively. During the six months ended September 30, 2019 and 2018, the Company paid commission expense to related parties in the amount of $2,395 and $0, respectively.
 
As of September 30, 2019 and March 31, 2019, the Company had cash and cash equivalents held in brokerage accounts of related parties totaling $166 and $8,444, respectively.
 
As of September 30, 2019 and March 31, 2019, the Company had loans issued to related parties totaling $0 and $1,888, respectively.
 
As of September 30, 2019 and March 31, 2019, the Company had margin lending receivables with related parties totaling $69,606 and $43,720, respectively.
 
As of September 30, 2019 and March 31, 2019, the Company had margin lending payables to related parties, totaling $2,233 and $1,090, respectively.
 
As of September 30, 2019 and March 31, 2019, the Company had loans received from a related party totaling $89 and $3,957, respectively.
 
As of September 30, 2019 and March 31, 2019, the Company had accounts payable due to a related party totaling $345 and $345, respectively.
 
As of September 30, 2019 and March 31, 2019, the Company had consideration due to a related party for the Nettrader acquisition totaling $2,668.
 
As of September 30, 2019 and March 31, 2019, the Company had customer liabilities on brokerage accounts and bank accounts of related parties totaling $35,539 and $29,904, respectively and held restricted customer cash on brokerage accounts of related parties totaling $10,294 and $13,999, respectively.
 
In August 2019, to comply with certain foreign ownership restrictions relating to registered Ukrainian broker-dealers, the Company sold 67.12% of the outstanding equity interest of Freedom UA to Askar Tashtitov, the Company’s president, for $100. The Company retained the remaining 32.88% of the outstanding equity interests in Freedom UA. In connection with this transaction, the Company also entered into a series of contractual arrangements with Freedom UA and Mr. Tashtitov, including a consulting services agreement, an operating agreement and an option agreement. For additional information regarding this transaction, see Note 1 – Description of Business.
 
 
26
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
  
NOTE 16 – STOCKHOLDERS’ EQUITY
 
During the six months ended September 30, 2019, nonqualified stock options to purchase 50,000 shares were exercised at a strike price of $1.98 per share for total proceeds of $99. No stock options were exercised during the six months ended September 30, 2018.
 
During the six months ended September 30, 2019 and 2018, shareholders made capital contributions of $0 and $225 to FRHC, respectively.
 
On October 6, 2017, the Company awarded restricted stock grants totaling 3,900,000 shares of its common stock to 16 employees and awarded nonqualified stock options to purchase an aggregate of 360,000 shares of its common stock to two employees. Of the 3,900,000 shares awarded pursuant to the restricted stock grant awards, 1,200,000 shares are subject to two-year vesting conditions and 2,700,000 shares are subject to three-year vesting conditions. All of the nonqualified stock options are subject to three-year vesting conditions. The Company recorded stock-based compensation expense for restricted stock grants and stock options in the amount of $781 and $1,554 during the three and six months ended September 30, 2019. The Company recorded stock-based compensation expense for restricted stock grants and stock options in the amount of $847 and $1,685 during the three and six months ended September 30, 2018 respectively.
 
NOTE 17 – STOCK BASED COMPENSATION
 
During the six months ended September 30, 2019, no stock options were granted. Total compensation expense related to options granted was $54 for the three months ended September 30, 2019, and $54 for the three months ended September 30, 2018. Total compensation expense related to options granted was $108 for the six months ended September 30, 2019, and $108 for the six months ended September 30, 2018. As of September 30, 2019, there was total remaining compensation expense of $220 related to stock options, which will be recorded over a weighted average period of approximately 1.02 years. During the six months ended September 30, 2019, options to purchase a total of 50,000 shares were exercised.
 
As disclosed in Note 16, on October 6, 2017, the Company issued restricted stock awards totaling 3,900,000 shares of its common stock to 16 employees and awarded nonqualified stock options to purchase an aggregate of 360,000 shares of its common stock at a strike price of $1.98 per share to two employees. Shares of restricted stock have the same dividend and voting rights as common stock while options do not. All awards were issued at the fair value of the underlying shares at the grant date.
 
 
27
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The Company has determined the fair value of such stock options using the Black-Scholes option valuation model based on the following key assumptions:
 
Vesting period (years)
  3 
Volatility
  165.33%
Risk-free rate
  1.66%
 
Stock-based compensation expense for the cost of the awards granted is based on the grant-date fair value. For stock option awards, the fair value is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Accordingly, while management believes that the Black-Scholes option-pricing model provides a reasonable estimate of fair value, the model does not necessarily provide the best single measure of fair value for the Company’s employee stock options.
 
The following is a summary of stock option activity for the six months ended September 30, 2019:
 
 
 
Shares
 
 
Weighted Average Exercise Price
 
 
Weighted
Average Remaining Contractual Term
(In Years)
 
 
Aggregate
Intrinsic Value
 
Outstanding, March 31, 2019
  350,000 
 $1.98 
  8.52 
 $2,342 
Granted
  - 
  - 
  - 
  - 
Exercised
  (50,000)
  1.98 
  - 
  394 
Forfeited/cancelled/expired
  - 
  - 
  - 
  - 
Outstanding, at September 30, 2019
  300,000 
 $1.98 
  8.02 
 $2,958 
Exercisable, at September 30, 2019
  60,000 
 $1.98 
  8.02 
 $592 
 
During the three and six months ended September 30, 2019, no restricted shares were awarded. The compensation expense related to restricted stock grants was $727 during the three months ended September 30, 2019, and $793 during the three months ended September 30, 2018. The compensation expense related to restricted stock grants was $1,446 during the six months ended September 30, 2019, and $1,578 during the six months ended September 30, 2018. As of September 30, 2019, there was $1,940 of total unrecognized compensation cost related to non-vested shares of restricted stock granted. The cost is expected to be recognized over a weighted average period of 1.01 years.
 
 
28
 
 
FREEDOM HOLDING CORP.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(All amounts in thousands of United States dollars, unless otherwise stated)
 
The table below summarizes the activity for the Company’s restricted stock outstanding during the six months ended September 30, 2019:
 
 
 
Shares
 
 
Weighted Average Fair Value
 
Outstanding, March 31, 2019
  2,275,000 
 $4,777 
Granted
  - 
  - 
Vested
  - 
  - 
Forfeited/cancelled/expired
  - 
  - 
Outstanding, at September 30, 2019
  2,275,000 
 $4,777 
 
During the six months ended September 30, 2019, the Company recorded expenses for share based payments for consulting services in the amount of $836.
 
NOTE 18 – LEASES
 
The Company determines whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the Company must discount lease payments based on an estimate of its incremental borrowing rate.
 
The Company leases its corporate office space and certain facilities under long-term operating leases expiring through fiscal year 2024. Effective April 1, 2019, the Company adopted the provision of ASC 842 Leases.
 
The table below presents the lease related assets and liabilities recorded on the Company’s consolidated balance sheets as of September 30, 2019:
 
 
 
Classification on Balance Sheet
 
 
September 30,
2019
 
Assets
 
 
 
 
Operating lease assets
Right-of-use assets
 $14,472 
Total lease assets
 
 $14,472 
 
    
Liabilities
 
    
Operating lease liability
Operating lease obligations
 $15,979 
Total lease liability
 $15,979